Determinants of Cash Holdings in Multinational Corporation's Foreign Subsidiaries: US Subsidiaries in China

Abstract

AbstractManuscript TypeEmpiricalResearch Question/IssueWe examine determinants of cash holdings in Chinese subsidiaries of US multinational corporations (MNCs), a setting where growth opportunities make cash holdings desirable for investment opportunities but also vulnerable to potential expropriation because of poor investor protection.Research Findings/InsightsWe show that headquarters accumulate larger cash holdings in foreign subsidiaries with locally registered patents and in foreign subsidiaries operating in the same industry as corporate headquarters. Further, foreign cash holdings are higher when these are safeguarded by a subsidiary board. Moreover, the effect of shared industry on subsidiary cash holdings is larger when a board is installed in the subsidiary. Finally, the positive relation between a subsidiary's capability to innovate and to transfer knowledge and its level of cash holdings is stronger when the subsidiary is led by US expatriate CEOs.Theoretical/Academic ImplicationsOur results indicate that MNCs accumulate cash in foreign subsidiaries with innovation and knowledge transfer capabilities. Furthermore, and in line with agency theory, we find that MNCs safeguard foreign cash via the installing of subsidiary boards and expatriate CEOs. These findings suggest that the installing of monitoring devices are crucial in reducing the potential expropriation risk of foreign cash holdings.Practitioner/Policy ImplicationsOur study highlights the importance of considering foreign subsidiaries' positions in innovation and in knowledge transfer when MNCs make decisions on the levels of overseas cash holdings. It offers insights regarding the importance of subsidiary boards and expatriate CEOs in monitoring and controlling foreign subsidiaries.